Trend lines are probably the most common form of technical analysis in stock trading.
They are probably one of the most underutilized ones as well.
If drawn correctly, they can be as accurate as any other method.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).
In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
How do you draw trend lines?
To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.
What’s next?
Nothing.
Uhh, is that it?
Yep, it’s that simple.
Here are trend lines in action! Look at those waves!
Types of Trends
There are three types of trends:
- Uptrend (higher lows)
- Downtrend (lower highs)
- Sideways trends (ranging)
- Uptrend | Downtrend | Sideways
Up Trendlines are drawn by connecting major lows or support areas.
Down Trendlines are drawn by connecting major highs or resistance area.
Sideways Trend are drawn by connecting resistance points and by
connecting support points.
Identifying Trends
Trends are durable swings in market condition; they show the general direction of a securities' price over time.
Uptrend | Downtrend | Sideways
To identify the trends. they possess certain conditions;
Uptrend - has a Low, High, Higher - High, and Higher - Lows
Downtrend - has a High, Low, Lower - High, and Lower -Lows
Sideways trend - Highs and lows are contained "Consolidations".
Trendline Periods
The most ideal periods in the Markets are:
1. Short Term
(3-6 Months)
2. Medium Term
(6-9 Months)
3. Long Term
(9+ Months)
How to trade using a Trendlines
Buy - Closer to pullbacks to support of an Up trendline or a breach of a Down trendline.
Hold - as long as your Trendlines do not break.
Sell - when your Up Trendline breaks.
Source:
www.babypips.com
Colfinancial.com
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